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As Hurricane Katrina works its way onshore somewhere along the Louisiana and Mississippi coasts the primary concern is for the safety of the populace, but the cross currents in the energy space could be dramatic.
It's much too early to tell the precise impact of this formerly Category 5 hurricane that packed sustained winds as high as 170 miles per hour with gusts above 190 mph. However, if recent history is any indication, the reverberations will be felt for weeks to come in the oil patch.
Hurricane Ivan, last year's headline storm, shut in 6.5 billion cubic feet (Bcf) of gas at its peak and caused oil prices to soar over 20% in the month following its September 2004 performance. A much stronger and larger Katrina is likely to do at least as much damage.
It's hard to gauge the impact of a storm the size and strength of Katrina because there have been only three Category 5 storms to hit the coast in modern history. Camille came ashore along the Mississippi and Louisiana coasts in August 1969. Hurricane Andrew hit Florida in August 1992, and a Labor Day hurricane with similar strength smashed into the Florida Keys back in 1935.
While the immediate question will be Katrina's impact on production in the Gulf of Mexico, there are more fundamental issues that will have to be addressed.
After a storm of this magnitude, it is likely the Department of Interior and Coast Guard will require a thorough inspection of most platforms, pipelines and rigs doing business in the Gulf of Mexico. While above-sea damage will be fairly obvious, it's damage below the water line that will have a more significant effect on production.
Along with Category 5 winds come powerfully turbulent seas that can wreak havoc on well and pipeline connections. Production platforms have underwater production systems that tie the platform to the sea floor to reach the producing fields thousands of feet below the ocean floor. While above-water platform damage can be readily identified and a repair plan put in place quickly, underwater-damage surveys take much longer and require special equipment, not to mention the complex, time-consuming nature of the repairs.
In addition to production systems, delivery systems are also jeopardized. Major pipelines run through the Gulf of Mexico, connected to each production platform by spurs, or smaller gathering systems that bring oil and gas into main transportation systems. Scores of connections were exposed to rough play by Katrina and will have to be inspected and, if damaged, repaired. Any pipeline damage is just as meaningful as platform damage because production is no good if product can't be delivered to market.
There are also a number of drilling rigs in the path of the storm that could have sustained damage. While many rigs were likely moved prior to the storm's impact, the sudden change in course and the wide swath of Katrina could have caught some rig operators by surprise. If so, there could be a lingering effect on exploration in the Gulf of Mexico.
Production Revisions, Refinery Challenges
Depending on the lingering impact of Katrina on production, it may be necessary for a number of exploration and production companies with production in the Gulf of Mexico to alter their production projections for the quarter and, perhaps, for the year. It's far too early to tell which companies might feel the impact but it is important to watch for announcements in the coming days as to which companies have damage that could affect longer-term production.
Katrina will also affect refining capacity. It is likely that nearly a million barrels of daily refining capacity will feel the immediate impact of the storm as refiners from New Orleans to Mobile, Ala., reduce or shutter capacity altogether until hurricane force winds subside.
Depending on lingering downtime caused by power outages and flooding, the refining outages could lead to gasoline shortages, especially in the Southeast, Florida in particular. With refiners running all out -- nearly 98% of full capacity -- any glitch can have a profound effect on product supplies. The most significant is likely to be to the Pascagoula, Miss. refining complex.
In addition, the Louisiana Offshore Oil Port, or LOOP, is closed and may have taken a hard hit as it sits near Grand Isle, where Katrina first arrived ashore. The LOOP, about 20 miles offshore, accounts for over 10% of all oil imported to the U.S.
Unfortunately, government policy responses are likely to have only limited impact. There will be a lot of talk about releasing oil from the U.S. Strategic Petroleum Reserve as a response to reduced production, and although that may help quell oil price nervousness, it won't help the lack of refining capacity in the U.S. The best thing the government can do to help in the aftermath of the storm is to make the inspection and recertification of refiners and offshore production and delivery infrastructure as efficient as possible.
While there are companies that will benefit from the aftermath of Katrina, it is still hard to gauge the impact of the storm and the remediation opportunities it will create. Clearly, transportation companies like
( OLG) should benefit. OLOG, as it is known in the energy world, carries workers to and from platforms in the Gulf of Mexico.
Other companies that stand to benefit include
Superior Energy Services
, all of which I profiled in a
hurricane outlook piece in June.
However, even though there will be beneficiaries from the aftermath of Katrina, the damage will remain the much more significant story.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback;
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